World View & Market Commentary. Forest first; Trees second. Focused on Real & Knowable facts that filter through the "experts" fluff and media hyperbole. Where we've been, what the future may hold and developing a better way forward.

Thursday, June 11, 2009

June 11 (Bloomberg) -- U.S. household wealth fell in the first quarter by $1.3 trillion, extending the biggest slump on record, as home and stock prices dropped.

Net worth for households and non-profit groups decreased to $50.4 trillion, the lowest level since 2004, from $51.7 trillion in the fourth quarter, according to the Federal Reserve’s Flow of Funds report today. The government began keeping quarterly records in 1952.

Americans are cutting back on spending as unemployment surges, home prices continue to drop and wealth evaporates, signaling any economic recovery will be slow to develop. The drop in net worth is one reason Americans are boosting savings, blunting the effect of the tax breaks and income supplements from the Obama administration’s stimulus plan.

“It’s going to be very difficult to have any recovery in consumer spending without jobs and incomes recovering first,” said Christopher Low, chief economist at FTN Financial in New York. “The probability of a debt-financed consumer spending binge like we saw in the last expansion is essentially nil.”

Retail sales rose in May for the first time in three months, an increase driven almost solely by U.S. shoppers returning to automobile showrooms seeking bargains and the rising cost of gasoline, a report today from the Commerce Department showed.

Smaller Decline

One positive aspect of today’s Fed report is that the decreases in net worth are starting to ease. Wealth dropped by a record $4.9 trillion in the last three months of 2008.

Americans have taken on less debt as the economic recession unfolds. While the jump in savings rate to 5.7 percent in April was helped by an increase in incomes linked to the fiscal stimulus plan, some economists are forecasting savings will continue to rise as consumers hold back on spending.

Real-estate-related household assets decreased by $551.1 billion, following a $974.5 billion decrease in the fourth quarter. Net worth related to corporate equities fell by $347.8 billion the first three months of this year.

Owners’ equity as a share of their total real-estate holdings decreased to 41.4 percent last quarter from 42.9 percent in the fourth quarter, today’s Fed report showed.

Consumer debt fell at a 1.1 percent annual pace following a 2 percent decrease in the fourth quarter that was the first drop on record.

Stabilization

Mortgage borrowing was unchanged from January through March, the first time in a year it didn’t fall, the Fed’s report showed. Stabilization in real-estate lending adds to evidence that the housing slump is easing.

Total borrowing by consumers, businesses and government agencies increased at an annual rate of 4.1 percent last quarter compared with a 6.2 percent gain the prior quarter. The gain was paced by a 23 percent surge in borrowing by the federal government, reflecting spending linked to the stimulus plan.

Business borrowing decreased at a 0.3 percent pace after rising 1.5 percent the prior quarter, the Fed said.

Borrowing by state and local governments increased at a 4.9 percent rate.

The economy contracted at a 5.7 percent annual pace in the first quarter and consumer spending rose at a 1.5 percent pace.

Economists surveyed by Bloomberg News this month forecast unemployment will climb to 10 percent by the end of the year and lowered their projections for consumer spending in the second half of the year to an average 1.1 percent annual pace. For all of 2009, purchases will drop 0.7 percent, the worst performance since 1974, according to the Bloomberg survey.

Never ending growth has come to an end. Here are some more charts to support that statement:

Let’s start with Total Revolving Credit Outstanding (credit cards). Here we see the first year-over-year (yoy) NEGATIVE growth:

Next is a chart showing Total Securitized Consumer Loans. Note that the dollar amount is falling. Remember that to have economic growth, each year must produce more credit than the year before:

Here’s Personal Savings in Billions of Dollars, suddenly the highest dollar amount since the late 50’s which is as far back as this chart has data:

And here’s the Personal Saving’s RATE:

Here’s Household Debt Outstanding yoy percent change… note that it just went negative for the first time ever on this chart since the early 50’s:

Here’s one that should be given more attention, Corporate Net Cash Flow, percent change yoy. NEGATIVE 20%, that is huge and cannot be sustained for long:

Look for bankruptcies, personal, corporate, and governmental to rise dramatically in the next year as those who have been hanging on waiting for "the turn around" to come. Me, I'm Comfortably Numb...